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Best currencies to invest in May: keep these five FX pairs on your radar

11:00, 18 May 2020

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Best currencies to invest in May

The latest forex market overview

The forex market has been relatively calm in May following several volatile sessions in March; during the peak of the coronavirus pandemic. That is partly because most analysts have already priced-in the economic damage caused by the disease and the lockdowns. For example, the US dollar did not move violently when the US released the weak nonfarm payrolls data in May. Similarly, the British pound was relatively unchanged when services PMI data fell to 13.

The calmness is also partly due to Central Bank actions. In the US, the Fed has brought interest rates to zero and started to implement an open-ended quantitative easing programme. Similarly, in Europe, the ECB has retained negative rates and removed the cap on its asset purchases. The same has been the case in the UK and Japan.

The currencies market will be influenced by several themes in May. First, there is talk of negative interest rates in the US. While the Fed chair has ruled against that, there are chances that market participants will be thinking about it especially now that inflation has cratered.

Second, the market will continue focusing on Brexit as June 30 approaches. The UK has until that date to request an extension to the talks and if no progress is made, it will increase the odds of a no-deal Brexit.

Third, as countries reopen, there are concerns about a second wave of the disease. In the past few days, second waves have started in South Korea, China, and Germany. If these waves continue, it means that the reopening in most countries will take longer and hurt the economy more.

Fourth, the fiscal stimulus debate in the US will rage on. Democrats have proposed a $3trn plan while some Republicans have raised concerns about the debt. In May, the US dollar could move in reaction to stimulus news.

The simmering tension between the European Commission, the European Central Bank, and Germany could influence the performance of the euro. The tensions started after a German court asked the government to conduct an assessment on the effectiveness of quantitative easing.

In this article, we take a look at the best currencies to trade in May, mainly focusing on those FX pairs that will be relatively volatile during the month.

Top 5 currencies to invest in May

GBP/USD

The British pound will be a key currency to watch in May because of the impact of coronavirus on the UK economy and the ongoing negotiations on Brexit.

The UK has become the epicentre of the Covid-19 pandemic in Europe. According to Worldometer, the country has confirmed more than 230,000 infections and 33,000 deaths.

The economy has been affected significantly. Recent data from Markit showed that the services PMI dropped to a record low of 13.4 while retail sales have tanked. Other key data such as construction, house sales and inflation have also been rather disappointing.

At the same time, the country is negotiating with the EU about Brexit. And, experts believe it will be impossible for the two sides to reach a deal within the next six months. Worse, Boris Johnson has until June 30 to ask for an extension of the transition period.

The Bank of England (BoE) will also be in the spotlight this month. In its most recent meeting, the bank left rates and its quantitative easing policies unchanged. Analysts believe that the bank will decide on whether to expand the asset purchases in its June meeting. Still, with the economy weakening, the bank could send forward guidance of its intention this month.

Therefore, we expect more volatility in the GBP/USD pair this month because of a confluence of coronavirus, Brexit and the BOE’s decisions.

USD/SEK

The USD/SEK peaked at about 10.3884 in March. Since then, the pair has been on a slow downward trend and is now trading at 9.8040.

the best currencies to invest in May 2020

Sweden has made headlines for its relaxed strategy in dealing with the coronavirus pandemic. Unlike other countries, the Swedish government did not order a lockdown. However, official data shows that the number of new infections and deaths is on an upward trend. This could have a negative implication on the economy, including the likelihood of a lockdown this month.

Another catalyst for the USD/SEK pair will be the board meeting of Riksbank on May 18. This meeting will come almost 10 days after governor Stefan Ingves said that the bank was ready to scale up measures if the economy worsens. With interest rates at zero, it means that the bank could move back to negative rates and an expanding QE.

The USD/SEK pair will also move in reaction to the employment data (May 25), Producer Price Index (May 27), retail sales (May 28), and Q1 GDP (May 29).

USD/ZAR

The USD/ZAR pair reached an all-time high of 19.0946 as the coronavirus spread. The market was concerned about the South African economy, which was in a recession even before the pandemic started. The country entered a technical recession – its second in two years – in the fourth quarter when the economy contracted by 1.4 per cent.

the best currencies to invest in May 2020

The USD/ZAR has been in consolidation near the all-time highs as the country starts to reopen. This consolidation has led to relatively low volatility on the pair. In some cases, low volatility is usually “the calm before the storm.”

This volatility could be stirred by the South African Central Bank, which will deliver its interest rate decision on May 21. With the base lending rate being at a historic low of 4.25 per cent, another cut could stir this volatility.

Other emerging market currencies to invest in now are the Turkish lira (USD/TRY), Singapore dollar (USD/SGD), and the Hong Kong dollar (USD/HKD).

USD/NOK

The USD/NOK will be another forex pair to watch in May because of its confluence of the current pandemic and crude oil prices.

The pair reached a YTD high of 11.7527 in March as the virus spread and the price of crude oil fell. The pair has been relatively calm in the past few weeks because the oil price has been relatively resilient. Also, the country has started to reopen its economy while the Norges Bank made a surprise rate cut during its meeting in May.

the best currencies to invest in May 2020

Crude oil will likely be the main cause of volatility for the USD/NOK pair. While the price has been on an upward trend, there is a possibility of a pullback as the expiry of the June contracts approaches. Also, the ongoing tussle between the US and China could push oil prices lower, which will create opportunities in the USD/NOK pair.

The key data to watch from Norway this month will be the retail sales and unemployment rate, which will be released on May 27.

Other oil-related forex pairs to watch will be the USD/MXN and USD/RUB.

EUR/USD

The EUR/USD pair peaked at about 1.1447 on March 3. In the past few weeks, the pair has been moving sideways since the market has been reflecting on information from Europe and the US.

the best currencies to invest in May 2020

In the US, the number of coronavirus cases and deaths has continued to rise while many countries in Europe have started to reopen. In their meetings this month, the European Central Bank (ECB) and the Fed made no new statements. They left rates unchanged and committed to continue with the asset purchases.

There will be several causes of volatility in this pair this month. First, the futures market in the US has started to price-in negative interest rates. Donald Trump has also asked the Fed to move rates in the negative zone. While the Fed chair has ruled out doing this, there are chances that the chatter will continue in the market.

Second, a conflict has emerged between the European Commission and Germany. This started after a German court issued a stern warning to the ECB about QE. This conflict could lead to more volatility in the EUR/USD pair

Third, the pair will likely react to the unfolding political situation in the US.

Conclusion on the best currencies to invest in May 2020

A lot has already happened in May. Key central banks such as the RBA, RBNZ, BOE, ECB and the Fed have already delivered their decisions and provided forward guidance. For the next part of the month, we expect the main drivers of the currencies market to be the ongoing reopening plans, the likelihood of a better coronavirus vaccine or drug, oil prices, US politics, Brexit, eurozone economy, China recovery and any change in policies by central banks. 

Forex is the biggest market in the world, with daily transactions worth more than $5trn. Identifying the best currency pairs can help you make more profits. You can use our guide on the basics of forex trading to learn more about the market and its opportunities.  

Read more: GBP forex news in May: watch out for volatility as coronavirus and Brexit converge

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